Regional banks hit by higher funding costs

Soaring funding costs and tough competition for retail deposits are among the biggest challenges facing regional banks as they seek to expand in a shrinking credit growth environment.

Bank of Queensland
chief executive
Stuart Grimshaw
singled out squeezed funding conditions as one of the biggest hurdles to the bank’s further growth.

“There’s opportunity for us to exploit [our] business model, which is a franchise system, but the biggest challenge is funding it," Mr Grimshaw said.

Data from the Reserve Bank of Australia shows that costs incurred by the major banks when funding their aggregate loan books has increased by about 140 to 150 basis points relative to the cash rate since 2007.

By comparison, the cost for regional players has been higher, the RBA data shows.

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Smaller lenders’ net interest margins – measurements of interest income relative to expenses – have fallen by between 10 and 15 basis points during the same period.

Bendigo and Adelaide Bank
said it sourced about 80 per cent of its funding from retail deposits, but was not oblivious to the onslaught of competition from bigger players.

“The industry-wide issue is you’ve got to pay more for deposits. There will be a rebalancing of value between all the stakeholders in a bank as these things work their way through," chief executive
Mike Hirst
said.

Australia’s fifth largest bank,
Suncorp
, said it was inescapable that regional players would have to fight harder for retail deposits.

Suncorp sources about 70 per cent of its funds from retail deposits but said the bank’s A+ credit rating from Fitch helped in efforts to access overseas funding markets.

“We’ve got a core term deposit and investor base [and] we will continue to compete for those deposits."

The comments come as the number of players in the regional and mutuals sectors across Australia continues to shrink.

In 2007, Bendigo teamed up with Adelaide Bank in a $4 billion merger. Bankwest was taken over by
Commonwealth Bank
and
St George
was bought by
Westpac
during the past three years.

Regional banks’ market share has declined from 14 per cent before the global financial crisis to 8-9 per cent today.

In the mutuals sector, the number of credit unions fell from 108 to 103 in the year to June 2011, while building society numbers declined from 11 to 10, KPMG research shows.

But a key advantage for regional lenders was their smaller size, Mr Grimshaw said. Regional lenders are nimble enough to mount a challenge to the big four banks if they choose their battlegrounds carefully.

“Some customers want that trusted relationship with their banker, and while regionals cannot compete with the big four on all levels, they need to pick the areas where they can – and this is one of them," Mr Grimshaw said.

“We don’t have the expensive legacy systems of the majors, so it’s easier to up and change."